What could Brexit mean for Scotland’s public finances?

I’ll remember the morning of 24 June for a long time. Whatever your views and vote in the EU referendum, it was clear something momentous had taken place. Certainties were swept away and now, nobody really knows what comes next.

And the vote came at a time when Scotland’s public sector was already dealing with significant change, including new financial powers, building pressure on the public purse and service reform. Add into the mix a new Scottish Parliament, a return to minority government and renewed debate about the possibility of a second independence referendum, and you have a future that’s far from fixed, and filled with both opportunities and risks.

The key question on everyone’s mind in the wake of the Brexit vote is what will it mean: for the country, for our politics, for me?

Of course, we don’t really know yet, but we can begin thinking through the implications and start exploring what it might mean for Scottish public finances.

Even with the devolution of further tax powers, the Scottish Government’s overall budget will continue to be linked to UK public spending decisions, and the state of the economy.

Following the EU referendum vote, the UK Government has set aside its deficit targets and Chancellor Philip Hammond has indicated scope for a ‘fiscal reset’ in the Autumn Statement, depending on early signs about economic performance.

And for its part the Scottish Government is proposing to delay the Scottish budget until it knows more, and has decided not to hold a three-year spending review at this point.

For now, all bets are off as to how things will pan out and how this will ultimately impact on Scotland’s public finances.

We know that European funding it is highly focused on a few areas in Scotland – agriculture, economic development and skills, fisheries and research. However, it’s hard for people and organisations to commit time and resources to planning if they don’t know which future is more likely to occur. The Chancellor has recently guaranteed that funding will be in place for projects established before the autumn statement but not everything is covered.

And there are other areas affected by EU rules to consider, such as procurement, environmental rules, entitlement to public services (for example, university tuition fees) and social security payments.

So a lot of questions and, at this stage, not many answers.

In Audit Scotland, we’ve extended the scope of our work on new financial powers to consider the implications of the EU referendum result. This brings together known and prospective constitutional changes affecting public finances, and will help us to identify the audit risks that we need to address in our work.

Key issues that we will need to consider are likely to include potential challenges to financial sustainability for public bodies exposed significantly to the end of EU funding streams, and the effectiveness of policy implementation in any areas that are transferred from EU to Scottish Government control and links to overall objectives, outcomes and performance

And of course, while the final destination isn’t yet known, further devolution in Scotland continues apace and the Scottish Parliament is receiving substantial new financial powers via the Scotland Act 2016. Whatever happens as a result of the EU referendum vote, these new powers need to be managed and integrated into the Parliament’s scrutiny processes and there is definitely a role for Audit Scotland to play. We’ve committed to supporting the Parliament to develop world-class arrangements for holding government to account and improving the use of public money.

We will therefore continue to work with its committees to strengthen the Parliament’s oversight, in line with the recommendation of the Smith Commission, and to support scrutiny of the implementation of the new powers.

If you’re interested in this area of our work, keep an eye on our New Financial Powers webpage for more updates.

About the author

Mark Taylor is an Assistant Director in Audit Scotland. He oversees a wide portfolio of central government audits, including the Scottish Government audit, and is the lead on our work on new financial powers and constitutional change.